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Monday, May 5, 2008

Is the US in a Recession?

The question of whether the economy is in recession always seems to be more confusing than it should be. Can’t someone just add up all the right numbers and tell us?

According to Wikipedia’s Recession page, the standard definition of a recession is when a country’s gross domestic product declines for two or more successive quarters. This means that we can’t say for certain whether we are in a recession until 6 months after the recession starts.

This gives pundits and experts at least 6 months to speculate on whether we are in a recession before the matter is settled. This is like having 9 innings to argue about which team is going to win a baseball game. No amount of careful study can say for certain who will win the game until it is over. Similarly, no amount of careful accounting can say for certain that the economy is in recession until the 6 months of decline have happened.

The US Commerce Department says that the economy grew by 0.6% (annualized) in the first quarter. This means that the US hasn’t been in recession, and we won’t be able to say for certain that the economy has fallen into recession until at least October.

Just to confuse things more, not everyone defines a recession in the same way. The National Bureau of Economic Research defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

By Warren Buffet’s definition, the US is in recession (see this article). Buffett says that “people are doing less well than they were three months, six months or eight months earlier and most businesses find themselves in that position too.”

Buffett’s definition sounds more useful than the standard definition of a recession. I wouldn’t want to accuse Buffett of cheering on a recession, but it should give him a chance to use his mountain of cash to buy some businesses while they’re cheap.

svbor: Interesting. I didn't investigate Buffett's claim. I know that he'd be happy to see stock prices cut in half so that he could put his mountain of cash to work. Is it possible that he is seeing what he wants to see?